1. Field of the Invention
The present invention relates to systems and methods for managing trading of investment vehicles, and particularly, to-be-announced (TBA) instruments.
2. Description of the Related Art
Mortgage backed securities (MBS) are bought and sold through different market mechanisms. Some mechanisms include a pass-through MBS issued by or guaranteed by institutions such as Fannie Mae, Freddie Mac and Ginnie Mae. A pass-through security may be created when multiple mortgages are pooled together and sold as undivided interests. The mortgages generally have similar characteristics, such as loan type, maturity and interest rate. An originator, such as a lender, services the mortgage and passes the principal and interest through, less a servicing fee, to a MBS issuer. The mortgages may be packaged by the issuer and sold to investors. The principal and interest, less guaranty and other fees are thus passed through to the investor. The investor receives a share of the resulting cash flows.
The pass-through securities, or MBS, may trade on a to-be-announced (TBA) market. A TBA contract is an underlying contract to buy or sell a MBS that is delivered at a predetermined future date. Under the TBA contract, the seller promises to deliver MBS on the future settlement date and a purchaser agrees to acquire a specified dollar amount of MBS. The contract is satisfied when the seller delivers the MBS pools at settlement. Thus, a mortgage lender may use a TBA contract to lock in an interest rate on loans it will fund before the loan is closed.
In a TBA market, MBS are traded on a forward or delayed delivery basis with settlement up to 180 days later. The actual mortgage pools comprising the MBS are not specified at the time of sale. In fact, many of the mortgage loans may not even be signed (and the mortgage pools created) at the time of sale. The largest volume of trading in the TBA market is for settlement within 30 days.
The parties to a TBA trade may agree to the type of security, coupon, face value, price, and settlement date at the time of the trade. During a period of time before the settlement date, such as 48 hours before settlement, the seller specifies or allocates the identity and number of mortgage pools to satisfy the TBA trade. Therefore, a mortgage originator may have until 48 hours before the settlement date to decide whether to use new pools of mortgages or to buy outstanding MBS to cover the trade.
In the TBA, trades may take place some time before the actual settlement of the transaction and underwater positions are subject to very high margins of up to 130% which are administered by the clearer of the TBA market, the Mortgage Backed Security Clearing Corporation (MBSCC) which is a subsidiary of the Fixed-Income Clearing Corporation (FICC). The MBSCC is an organization that provides netting and pool notification services to the mortgage-backed securities market.
Each day the MBSCC gets the closing prices for each forward MBS and determines the mark to market for margining. For example, if a position netted out to show a loss of $1 million, a clearing firm would have to post $1.3 million. Initial/base margins are said to be $250,000 plus an additional 32 basis points on your net position. If the net position is positive, this may be credited to reduce 32 basis point minimum on the net.
TBA markets that provide security and saving from cross-margining for the trading parties are desired. Increases in trading efficiencies, pricing, execution, delivery and settlement of TBA contracts as well as the underlying MBS may increase liquidity and provide security for traders. Therefore, there is a need for systems and methods for administering, settling, and clearing of traded TBA instruments.